Eurozone Economy Will Contract In 2012

The eurozone’s economy is heading into a second recession in just three years. According to the European Commission’s report, economic output in the 17 nations sharing the euro will contract 0.3 percent this year, changing an earlier forecast of 0.5 percent growth in 2012.

The full-year eurozone’s economy contraction would be the first since 2009, when it experienced a 4.3 percent drop in GDP output triggered by the U.S.-led banking crisis. The negative 2012 outlook for the EU is a result of continuous sovereign debt problems, fragile financial markets and a slowing real economy.

The EC’s growth forecast for the eurozone is a bit more optimistic than the one of the International Monetary Fund projecting the euro zone’s economy to contract by 0.5 percent this year. However, the EC and the IMF both agree that the EU’s modest recovery is expected to start from the second half of 2012.

The EC’s report also points at a higher inflation forecast reaching 2.1 percent, which is above the European Central Bank’s 2 percent limit. In November it had counted on 1.7 percent inflation. Higher inflation may potentially limit the ECB’s scope for a further cut in its main interest rate from 1 percent.

The downgrade in the eurozone’s output was mainly attributed to the negative prospects of the southern European economies, and the widening gap between them and the wealthy economies of northern Europe.

Greece is expected to have the sharpest downgrade, with this year’s contraction now seen at 4.4 percent compared with 2.8 percent in November. Portugal’s economy will shrink 3.3 percent, compared with the previous forecast of 3 percent. Italian and Spanish economic output will decrease by 1.3 percent and 1 percent, respectively.

Ireland, by contrast, will grow 0.5 percent, expanding for the second straight year. Germany and France, the eurozone’s two largest economies, with the respective growth of 0.6 and 0.4 percent, are likely to escape recession in 2012.

“Although growth has stalled, we are seeing signs of stabilization in the European economy. Economic sentiment is still at low levels, but stress in financial markets is easing,”- said EUs’ Economic and Monetary Commissioner Olli Rehn at a meeting in Brussels. [Bloomberg]